3 Plays to Re-Mount the Copper Bull

by Susan J. Aluise | April 12, 2012 9:00 am

Conventional wisdom left a message for metals investors seeking first aid for flagging portfolios: “Dr. Copper” is on bed rest.

It’s no secret that slower projected growth in China, a still-sluggish U.S. economy and continued fears about Europe’s debt mess have left the red metal ailing in recent weeks. Those concerns have combined to push copper prices to their lowest levels since January; over the past three days, the metal has slipped more than 4%[1].

But while the risks of a global economic slowdown led by China and the U.S. are real, bears who run from copper now could be leaving money on the table.

True, slower growth in China likely would have a negative impact on copper prices. After all, the country consumes about 40% of the world’s copper.

However, China’s slowdown is not quite as gloomy as it looks. In its annual report released on Wednesday, the Asian Development Bank said although China’s growth will moderate slightly during the next two years, it still will exceed an annual growth rate of 8%[2] for the next two years due to strong investment, rising private consumption and a stabilizing global economy. That means for the long term, there are good reasons to stay bullish on the red metal.

But not all copper investments are alike. Commodities futures contracts aren’t a good play for the average investor because they tend to be complicated and require a sophisticated futures account. With spot copper prices at about $3.65 per pound and copper bars retailing for more than twice that price, copper bullion probably is not the best option for most investors, either.

So instead, let’s look at three more realistic ways for most people to invest in copper: a stock, an exchange-traded fund and a mutual fund:

Southern Copper

Southern Copper (NYSE:SCCO[3]) conducts mining operations in Peru and Mexico. It also operates open pit mines and metallurgical complexes that produce copper, zinc and precious metals. With a market cap of $25.7 billion, it is trading a little above $30 and is about 34% higher than its 52-week low last October.

Pros: The stock has a price-to-earnings growth (PEG) ratio of 0.7, so it’s undervalued. It also has a lofty dividend yield of nearly 6.7%.

Cons: A 16% decline over the past 52 weeks is partially to thank for both the low valuation and high yield. And Southern Copper is a single stock, it’s not diversified.

Global X Copper Miners ETF

The Global X Copper Miners ETF (NYSE:COPX[4]) aims to track the performance of the Solactive Global Copper Miners Index. With a market cap of $32.2 million, COPX is trading slightly above $13. Top holdings include mining companies like Grupo Mexico (PINK:GMBXF[5]), Lundin Mining (PINK:LUNMF[6]) and (wouldn’t you know it?) Southern Copper. It has a one-year return of -33%, though it has managed year-to-date gains of 1.5%.

Pros: Global X Copper Miners offers easy diversification, as the holdings include multiple mining companies. And because it is an ETF, it trades on an exchange just like a stock. COPX also offers a 4.3% dividend yield.

Cons: COPX has an expense ratio of 0.65, which is a little high for an ETF. The fund invests in mining stocks rather than copper futures contracts like United States Copper (NYSE:CPER[7]) or iPath Dow Jones Copper (NYSE:JJC[8]).

Rydex Series Precious Metals Fund

The Rydex Series Precious Metals Fund (MUTF:RYZCX[9]) offers a very different way to play copper as part of a diversified precious and base metals mutual fund. With total assets of $121 million, RYZCX is trading a little above $55. Nearly 11% of the fund’s holdings are in Freeport-McMoRan Copper & Gold (NYSE:FCX[10]), a major copper mining company that dabbles in gold, silver and other minerals; Southern Copper accounts for another 3%. The rest of its holdings are largely in gold and include Barrick Gold (NYSE:ABX[11]) and Newmont Mining (NYSE:NEM[12]).

RYZCX also struggled in 2011, losing 32% of its value. It’s also down 6.5% so far in 2012, but it could be poised for a comeback.

Pros: The Precious Metals Fund offers broader diversification by serving up both copper and gold exposure. RYZCX also has a long track record, having been around since April 2001.

Cons: Unlike ETFs, mutual funds don’t trade over an exchange like stocks. RYZCX also has much higher fees, at 2.3%, and requires a minimum investment of $2,500.

Bottom Line

Eventually, Dr. Copper will get off his sick bed and back to work making money for investors. As with all investments, there are risks and the red metal likely will face headwinds over the next 24 months.

If you are looking for some exposure to copper, but don’t want to make a big investment, COPX could be your play. If you have a longer investment horizon, are in a position to wait for a rebound in copper prices, don’t need to trade on a major exchange and like the added benefit of gold, RYZCX is a good option. And if you are an income investor looking for dividends, it’s hard to do a lot better than SCCO’s 6.7% yield.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

  1. metal has slipped more than 4%: http://www.bloomberg.com/news/2012-04-11/copper-may-decline-for-third-session-on-chinese-demand-concern.html
  2. it still will exceed an annual growth rate of 8%: http://www.adb.org/news/prc-growth-remain-robust-economy-diversifies-adb-report
  3. SCCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=SCCO
  4. COPX: http://studio-5.financialcontent.com/investplace/quote?Symbol=COPX
  5. GMBXF: http://studio-5.financialcontent.com/investplace/quote?Symbol=GMBXF
  6. LUNMF: http://studio-5.financialcontent.com/investplace/quote?Symbol=LUNMF
  7. CPER: http://studio-5.financialcontent.com/investplace/quote?Symbol=CPER
  8. JJC: http://studio-5.financialcontent.com/investplace/quote?Symbol=JJC
  9. RYZCX: http://studio-5.financialcontent.com/investplace/quote?Symbol=RYZCX
  10. FCX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FCX
  11. ABX: http://studio-5.financialcontent.com/investplace/quote?Symbol=ABX
  12. NEM: http://studio-5.financialcontent.com/investplace/quote?Symbol=NEM

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